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Indiana University Narrator
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Bloomberg Host
Bloomberg Audio Studios Podcasts Radio
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Bloomberg Interviewer
News Apollo Global Management president Jim Zalter is highlighting a pressure point on the horizon. He writes the following. If Alphabet can't self AI capex, think about the smaller players. June is shaping up to be a real stress test for the investment grade market. Jim joins us now for more. Jim, good morning. Good to see you.
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Jim Zalter
Good morning. Always fun to be here.
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Bloomberg Interviewer
Think about the paper that we've been moving. We have priced almost a trillion dollars, a trillion dollars plus of investment grade credit in almost record time so far this year. We're talking about mega IPOs on the horizon. Alphabet Alphabet issuing numbers that are so difficult to internalize. An $85 billion capital raise is the demand out there to meet the supply.
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Jim Zalter
I think it just shows the breadth of these global markets. And I think if I've come here in the last couple of years and I've used a term, it's always and not or it's, it's the IG market and the private credit market and the equity market. And I think that theme just really continues. I mean certainly what Alphabet executed this year, this past week in the scale, the scope, I suspect it won't, won't be the first big mandatory convert to gets done. I'm sure many other companies in that sector are now looking at these securities. The ability for an investor to clip a nice coupon and have a debt exposure to these companies, I think that's, that's a new market. But you know, I think also I would also ask you to take another step back.
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Bloomberg Interviewer
Sure.
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Jim Zalter
It's not only the scale of these, I mean last 15, 20 years the annual equity issuance between IPOs and equity capital markets activity has been plus or minus 200 billion a year. That's the number last 20 years. You take the year of 21 out of SPACs, you know, with, with OpenAI, Anthropic and Space X, those three companies will eclipse that number. And I think there's, there's commentary about what it means to take a company public today. I mean the, the scale that you need to achieve to be relevant is much, much higher than it ever was before. That impacts a lot of smaller enterprises that are 5 to 10 billion. I also think as much as we're talking the last four to six weeks about the AI capex Boom, which is phenomenal and unprecedented. I think we're forgetting that there's a lot of other industries. There's the defense industry, there's a utility industry, there's going to be a number of other industries. So I think it's broader but these numbers are unprecedented. But it just shows you the scale of the marketpl.
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Bloomberg Interviewer
You're getting to the heart of a potential issue though is the space for everyone. How much crowding gap will there be?
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Jim Zalter
Well, I do think, you know, we've been consistent, Torsten's been consistent about the impact on longer tenor rates for governments around the globe. I think that is a very real issue. I've been consistent here, coming here in January and February and April that rates were not going down in the short term. I do think, you know, we've always talked about 15, 20 years ago the crowding out effect of government debt. I think you're seeing potentially long term crowding out of this massive long duration capex boom around the globe and the impact on government debt yields around the globe. So I think there is some dynamics there. But as I said a few weeks ago, this year the AIG market will have net issuance higher than the treasury market in the U.S. i mean we got to put these numbers in perspective. The the mag 7 cap ex this year will be larger than the Defense Department spending. I mean these are phenomenal numbers and again I just think it's broader. I think there is no doubt that there is, there is health and breadth in the market but I think some pullbacks once in a while and some good questions that get answered. You know these numbers are unprecedented and these companies will have to make the return on capital to justify the capex.
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Bloomberg Host
How are you at Apollo? Trying to protect yourself against the increasing risk as these numbers get bigger and bigger and as expectations get higher.
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Jim Zalter
Well, it all goes down to what your liability is for us because we have our third party business as well as our regulated balance sheet. We're trying to find areas where we can fund the picks and shovels, the AI infrastructure, not just the AI CapEx to the equity. There's a difference. We've been rumored to be involved in a variety of chip financings and those financings allow you to get in the middle of a variety of, of investment grade companies that want to fund the purchase of the chips for a variety of these companies. And you can do it in a, in a structure that basically lets you amortize that risk over three, five, seven years. So you either are taking, if you take residual risk You've taken your basis down to zero. So I think there's ways to do that. I'm not suggesting there's investors who are really good at buying the equity of these businesses. That's not what we do. But I think the, the ability to fund the infrastructure and really structure it such you're not taking residual risk. I think there's an ability to do that now. It comes at a lower rate, a higher quality counterparty, but that's all really structuring.
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Bloomberg Interviewer
Well, let's talk about the rumors. So I'll explore them in ways that maybe don't put you on the spot too much. Let's just say there is a firm that's getting together with another firm, maybe Talking about roughly $36 billion of debt financing to help maybe to some company like Anthropic pay for some chips from say Google that Broadcom helps develop. Let's just throw that out there and just say maybe that's a story that might be on the rise and something that happens. Let's get into how you structure that. So there's a senior part senior tranche, and then you've got a subordinated tranche as well. Can you just explain to us how you could use an IG balance sheet like Broadcom to support something like that? Just help people understand how you.
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Jim Zalter
I think that what I would want to highlight is in every financing, there's folks who want to take shorter duration risk 1 to 3 years. There's folks who want to take longer duration risk 3, 5, 7 years. There's either senior and then they're subordinated. So between maturity, between where you fit in that stack, you appeal to different buyers. In the fixed income universe. The fixed income universe is like the equity universe. There's value buyers, there's growth buyers, there's growth at reasonable price buyers in the equity market. In the, in the, in the fixed income market, there's folks who like short duration risk, one year, two year risk, that is sometimes banks, there's longer duration investors who will take more of a residual risk. And so you're just appealing to different risk tolerance all in the investment grade community. But you're doing it just like in the equity market when Alphabet goes out and raises an equity deal and a mandatory convert, you get what you. What they're really doing is they're appealing to a, an income buyer in the equity market that might not necessarily be able to buy that equity because of the low dividend yield. So again, you're just really appealing to the beauty of the US is we have the most robust, deepest, broadest markets in the world. And so you know, a company can do a mandatory convert 5, 10, 15, 20 billion in size and there's plenty of, of equity income accounts that want to buy that. And you can also do a large equity offering and then a follow on at the money offering over the next several months. And there's breadth and depth. Very really nowhere else in the globe has that breadth and depth of the marketplace.
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Bloomberg Host
Breadth and depth is certainly here, which is the reason why you're seeing this, these incredible IPOs and debt issuance. The scale of money being raised around the world really is mind boggling. It's not just the us, it's Germany, it's also over in Asia in a number of places. Whether it's IPOs, whether it's corporate debt, where is the money coming from? Right. I mean how do you compete for this money and how much higher do yields have to go not just in the treasury world, but also on your end when you see coupons, don't they have to climb considerably just to compete for your capital?
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Jim Zalter
Well, you know, you know, relative. Even though rates have risen to where they were three to four years ago in the US, rates in the US are approximately where they've been over the last 30 to 40 years. Like we're in a more normal rate environment right now. And a theme that I've been talking about, I've been here the last couple of years is we have an amazing broad retirement challenge around the globe. There are many investors in the UK and Canada and Australia and the west that do not have the right retirement savings structure. At the same time you've got this major global industrial capex today. It's an AI, it'll be in other industries and appropriately matching that duration of demand for assets with the duration of the companies needing to borrow money. It actually you'd be surprised the depth and breadth of these markets. And so you know, we're active now in the uk. In the UK there's a concept called matching adjustment. Whereas a regulated balance sheet you need to actually have long duration. And so they funded student housing and a lot of other activities. So you know, I do think there is a natural point in time right now where we do have these retirement pools around the globe that are looking to invest long term. And actually if you look at what the treasury market has done, the treasury has really been funding a lot of their financing in the short end, the last three to five years, really one to five year financing, there's a shortage of Long duration paper out in the globe right now. You've had other guests on this show talk about the lack of long duration assets against the breadth of long duration liabilities. So I do think that's a broader theme that we should talk about. The other thing I would talk about is, you know, this came up last year, we were talking about a lot of the tariff activity. The benefit of the breadth of this, of these capital markets is US companies are the beneficiary of lower cost capital and access to capital. That's a, that's a, that's a, that's a flywheel of economic growth. And again going back, what Alphabet was able to do, their IPO was you know, 1.7 billion 26 years ago or 25 years ago. And it is phenomenal, but it is a, it's a hidden gem of the U.S. economy. And so when we talk about taxing foreign investors, we have to be very, very careful because this cost of capital, this breadth of capital, I think it's no surprise that we've been leading the globe in this, in this capex cycle because these companies do have access.
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Bloomberg Interviewer
It's the secret sauce without a date. No doubt, a doubt. We at the creative stage of financing from the outside looking in, people might hear some of these stories. The conversation we just had nothing circular financing of balance sheet debt with the creative stage, the more dangerous stage. I would suggest, you know, I think
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Jim Zalter
that you always have to be aware of who's taking equity risk at a fixed rate of return. I think, you know, my 41 years tell me I want to be investing with the leading companies. When you think about the world today in terms of winner take most concentration in the top three or four companies. I think it would lead you to be wanting to invest alongside these companies and to do so in a manner where you are well structured with downside protection. But I think that there, let me be very clear, there will be companies that enter this capex cycle, some on the investment grade side, some on the non investment grade side, that their business models will prove not to be as resilient over five, 10 years. That's the destructive aspect of capitalism and I think you're getting paid for it still with, with a lot of structure, but I do think the overall trend is in the right direction.
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Bloomberg Interviewer
So we're not at the prospect, at the very precipice of hitting capital constraints right now.
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Jim Zalter
I don't think so. I think, you know, I do think it's interesting when you think about, you know, why Alphabet did this. I mean there is a depth and breadth in the IG market. We talked about it earlier how much they've done. What's interesting though is I talk about a lot is in the equity market, if you're an investor, you don't mind or you can, you can absorb the idea of getting very concentrated in a name because you can move in and out of it very quickly and you're getting paid because of the convexity complexity of that equity. In the fixed income market, as a IAG buyer, bonds don't go to 200, they can go down dramatically. And being a little facetious there, but my point is you need to have breadth of distribution and diversification in the fixed income markets. And so it's not as if Alphabet or Microsoft or Broadcom doesn't have exposure. They're just trying to find a broader universe of other buyers that that will be able to access and provide funding.
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Bloomberg Interviewer
Jim, you're going to stick with us. Jim's outer there of Apollo Global Management
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Indiana University Narrator
Preparing for tomorrow's careers requires forward thinking education. Indiana University graduates are degrees above the competition, building on strong foundations to create new possibilities that make a difference where you live. IU trained nurses practice simulated emergencies before setting foot in a hospital. Future teachers gain guided classroom experience through IU before graduating high school. And IU engineering students solve modern technology challenges through cutting edge microchip research that impacts everything from cell phones to space travel. Developing a talented workforce isn't a side effect of an IU education, it's the outcome. Learn how IU supports workforce development at iu. Edu impact
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Bloomberg Interviewer
so here's the latest this morning. The president maintaining a deal could be near as Tehran says there has been no tangible progress and Hezbollah and Israel continue to exchange strikes.
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Political Analyst
They continue to exchange strikes. And a question we have been asking on this program is at what point would this administration say actually drones coming at our allies, ballistic missiles coming at our allies and our and our air bases means that the cease fire is over. I think the most important story is the Wall Street Journal overnight saying Trump has told aides privately that when he would consider ending the cease fire is if Iran targets American troops directly. So if American troops lives are injured in a way or that they're killed, that is when maybe he would decide to end the cease fire. So basically I think this tells Iran they can continue with some of these clashes and skirmishes until now, until they get a deal. The president says we're going to get a deal soon. But the point you've been making continuously is how many Times have we been here since the end of February for
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Bloomberg Interviewer
markets it hasn't really mattered. Who remembers this conversation from a few months back? Take a listen to this.
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Jim Zalter
Sometimes there's days we should just go out and take a walk around for 30 minutes. You just had a quarter with record M and A literally record M and A in the United States and globally we've really lost the plot on credit we're talking about a little bit of skirmish on the sidelines here. I suspect if I'm sitting here in three to six months we'll be talking about a much much different backdrop.
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Bloomberg Interviewer
Here we are a few months later Jim sounds back with us. Jim, congratulations because you were dead on. Absolutely right. Few months later the market stopped having this conversation about this issue.
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Jim Zalter
Well it was interesting to see with a strong earnings season the last six weeks you know and they were strong across the board. The big focus was Capex. You know who has the bigger Capex budget. It almost it's in essence that's a marketplace where there's more greed driving the market than fear is David Solomon quoted yesterday. So that's certainly the backdrop. I mean certainly I've been consistent having a view that for the next year to two years we think that inflation is a bit more of a concern. I don't think it's going to affect the fundamentals of the market. I am candidly surprised and I've been consistent that if we were still talking about Iran at this point with the straits being closed flows and the impact on oil prices that we would see some second and third derivative volatility that so I'm a bit surprised but you know momentum and emotions can work both ways and they can change pretty quickly. But I do believe this bigger trend is is upon us and I think this will be the conversation we have for the next couple of years.
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Bloomberg Interviewer
Take a walk. That was the advice at the time and it was good advice too based on how things have taken turned out the one thing that really surprised us is how much earnings expectations have climbed through this war. That was the surprise it clearly to the market as well promo given the price action we've seen.
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Bloomberg Host
Yeah and when they don't outperform in a significant way then they're penalized at what cost and ultimately this is one thing I'm wondering whether this is keeping either Jim up or others the labor market and at what point do we start to see the ramifications of all of these cuts potentially to pay for for AI and we're seeing that in some of the Challenger Christmas Challenger reports earlier this morning.
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Bloomberg Interviewer
Jim, what stage are we at? The return on investment stage? Is that still further down the line? Are we at this point where you have to cut operational expenses to support a lot of this funding, a lot of this debt, a lot of this money?
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Jim Zalter
I think there's some marginal optimization around hiring right now. I think the secular trends that are the big question mark in front of a lot of folks, if we're sitting here and, and In June of 28 we will have a much better insight in terms of really what's are, what's the secular impact of, of these, this CapEx cycle and I on broad, broad employment numbers. I think any changes you see over the next year or two were, you know, a percent, you know, a quarter of a percent up or down. I don't think there are long term secular trends and I think we'll be talking about how does the, the extent of this CapEx cycle, the extent of the AI boom, the extent of the return on invested capital. That's the conversation I think we'll be having. And I think that then at that point in time, once you have a sense of the employment numbers or the employment impact, once you have a sense of the returns, then that's going to feed into is the inflation going to be curtailed and turning into a deflationary environment. But I think that's 18 to 24 months out. I think anybody that tells you they really have it nailed right now, I would suspect that they really have not been doing this for a long time because I think there's a healthy degree of humility you have to have by making those huge macro views.
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Bloomberg Host
Does the labor market keep you up at night, this transformation?
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Jim Zalter
Not, not. I think it does. I think any leader of a business today is thinking about how they want to evolve their business. Last week I was at a leadership meeting of a bunch of CEOs down in Texas. They were, you know, these were not all tech companies and the big questions were how do I fund my aspirations in my industry? That was an industry that was a conversation that they would not have invited the head of Apollo to be there 24 months ago. Okay, we were front and center in that conversation. And they're also thinking about how they deploy their resources, of which human capital is the biggest element. And they want to execute their plan today, but they also want to make sure they're investing in the future. And I don't think anybody is having a massive. Yeah, you're seeing sub headlines of companies that will make 10 or 20%, you know, hiring cuts across the board. Yeah, I don't think that's, that's the mainstream.
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Bloomberg Interviewer
Jim, it's always good to see you, buddy.
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Jim Zalter
Always good.
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Bloomberg Interviewer
Thank you, Jim. Sound to that of Apollo Global Management. A good lesson for us all. I took a walk yesterday.
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Bloomberg Host
Good.
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Jim Zalter
Beautiful day in New York.
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